Board Structure, Board Activity and Firm Performance: The Case of Korea
Jootae Kim, Jai S. Kang
In agency theory, it is asserted that boards with a high ratio of outside directors can monitor management effectively, but empirical results from past studies are not consistent. We suggest the “process perspective” as an alternative approach, arguing that the board activity, rather than the board structure, impacts the firm’s financial performance; and apply this perspective to Korean companies. We test the impact of board structure on both board activity and profitability, and then the impact of board activity on firm profitability. The test results were: the board structure [measured by the ratio of outside directors in the board membership] does not have positive influence on either board activity or profitability [measured by ROA] in Korean firms; however, the board activity, measured by the rate of outside directors’ participation in board meetings, has a positive relationship with a firm’s profitability. We explain this as a decoupling, based on institution theory, which occurred in the process of forced Korean governance reform of 1998.